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Color of Money Live With Michelle Singletary
Planning for Your Child's Retirement

Tuesday, July 27, 1999

Michelle Singletary

On the way to pick up my two kids, I heard a radio ad about a new investment product aimed at parents thinking about their children's retirement. That's right not their own retirement but the golden years of their toddlers sometime down the road, say in 2070.

I had to turn the radio up for this. The man was saying that for $5,000 each, my kids could be millionaires by then.

He's thinking retirement. I'm thinking, for goodness' sake, my kids aren't even completely potty-trained!

Ric EdelmanFor a minimum of $5,000 and a one-time setup fee of $300, the pitchman on the radio said, a parent or grandparent can open a Retirement Income for Everyone (Ric-E) Trust in their kid's name. The tax-deferred annuity can't be tapped until the recipient is at least 59.

If, as the pitch went, the trust's assets grow at 10 percent per year, that $5,000 investment would be worth more than $2.4 million by the time the infant reached age 65. That would be about $350,000 in today's dollars, said Ric Edelman, the Fairfax-based financial planner who created the trust.

Edelman joined us to discuss ways you can plan for your child's retirement and why you might want to.

For background information, read my column on Edelman's Ric-E Trust.

Please note: We cannot offer specific personal financial advice or answer detailed questions about individual situations.



Transcript Follows


Michelle Singletary: Welcome again to a discussion about money - my favorite topic. Thanks for joining me today Ric.


Arlington, VA: Mr. Edelman:

Most people are in so much debt and not saving enough for their -own- retirement. I think middle-class and affluent parents hand their kids too much anyway--cars, clothes, cellular phones--and setting up a retirement account -while a lovely thought- is just another way to shelter them from reality.

Ric Edelman: I agree completely that many people simply do not do what is required to insure that have enough money in the future. to that end, "giving" them even more is pointless -- for no matter how much you give such people, it'll never be enough. But there are also a lot of people who can't earn enough to meet their needs - due to illness, marriage problems, health problems, job loss, or career choices that simply don't pay much. For all these people, help is not a bad idea.


Washington, DC: I'm still thinking about how to plan for my own retirement, but I'm curious about the idea of helping my kids as well. We've already got college funds up and running, how different is this type of system from the one we already have begun? And should our college funds not be enough, would we be able to dip into these child retirement account to make up the difference?

Ric Edelman: College planning, of course, is what most parents think about when it comes to saving for children. But retirement is also a big concern for the kids. The RIC-E Trust, however, is not a college planning tool. The trust, in fact, CANNOT be used for college. The only way for the child to get the money is to reach retirement age (an age you set, at least 59 1/2) or to die (never a preferred option!). Therefore, you should set money aside in the RIC-E Trust only if you are willing to have that money left untouched for many decades.


Michelle Singletary: I have a more general question about the lengths to which parents today go to finance their kids. Studies show more and more people are dipping into their retirement pot to pay for private schools and college for their kids. Other parents are taking out second mortgages to pay for college. Still others are spending tons of money so their baby can get married. What do you think of this type of spending?

Ric Edelman: You've hit on one of my pet peeves, and I've written extensively about this in both of my books. Far too often, parents will do "whatever it takes" to get their kids into the college of their (the kids') choice -- regardless of the cost, and regardless of the economic consequences - to both the kids and the parents. As you've pointed out, I've seen parents liquidate from their company retirement plans, cash out their IRAs, borrow against the equity in their homes and take 2nd jobs. They do all this without considering the impact on their own future - let alone that of their kids. Usually, it's a huge mistake- one that parents must stop doing.


Hoffman Estates, Illinois: How is money invested by the Ric-E Trust

How can we rely on continuity for so many years

And if Mr Edelman does not continue on THIS planet for the full term of the period of my children to 59 1/2, what provides for the continuance of the theme of money growth?

Ric Edelman: The continuity is provided by the trust itself; that's why we use this type of vehicle. Trusts are designed to last for generations, if need be. The problem, historically, is that trusts are very expensive to maintain, due to trustee fees. I've solved that problem with the RIC-E Trust: all trustee fees are waived for the entire life of your trust! furthermore, I've designed it so that you don't have to worry about me hanging around: first, you don't have to select me as your advisor of record (there are 10,000 advisors in the country you can select instead) and you at any time can fire the advisor you selected and appoint another one. You (actually the child) retain full control over this for your lifetime.


Michelle Singletary: I understand the concept of the Ric-E Trust but I have a real problem with "untouchable" money. Isn't it always good to invest in products that allow some sort of withdrawal even if there is a penalty?

Ric Edelman: Ordinarily, I'd agree with you. As an advisor, I always caution my client to invest their money in places where they can get to it, and not to "lock it up" where it's untouchable.

But this trust is different. I created it for a specific reason: to help you insure that YOUR CHILDREN will have money for THEIR future. Thus, this is not YOUR money that YOU are setting aside for YOURSELF; it's money YOU are setting aside for THEM. And the only way YOU can be certain that the money will be there at their retirement is to set it aside in a trust where they can't touch it. Therefore, the normal PROBLEM of untouchability (is that a word?) is actually the POINT of this trust.


Michelle Singletary: If I may, let's talk some more about this concept of "doing whatever it takes." Isn't it important that parents get the best education for their kids. Doesn't that pay off in their future earning potential? So, then why isn't it a good idea to spend until it hurts to educate your kids. After all you can't take it with you.

Ric Edelman: Good question. but in today's economy, no, it doesn't always make sense to do whatever it takes - for the "return" on that "investment" doesn't always pay off. For example, most careers do not reward children enough to justify spending $100,000 for a degree. and let's not forget grad school -- that's another $30,000 to $50,000. One of my clients is a lawyer who got out of Georgetown Law $100,000 in debt - and his wife, also a GU lawyer, owes $90,000. how on earth are they ever going to buy a home? These issues must be determined in advance. In their case, at least, as lawyers, they have the ability to earn a lot. Imagine if they were schoolteachers!


Arlington, VA: Hi Ric -

I must tell you that my father gave me a copy of "The Truth About Money" when I graduated from college two years ago and highlighted certain passages - most notably "out the door by 24" and the section on the importance of investing for retirement as early as possible. I've followed that advice - have been living 100% on my own for a year now and have been investing in the TSP -I'm a federal employee- since I was first eligible -7% with 5% matching-. My question now is - I'm tossing around the idea of purchasing a condo-home in Northern Virginia at some point in the next few years. -It seems crazy to keep paying money to someone else for rent.- What advice do you have as far as tips for saving for a down-payment and setting myself up to qualify for a mortgage loan?

Ric Edelman: I like your idea of wanting to buy a home -- but, please, don't buy a condo. In The New Rules of Money, I talk about this a lot. Condos don't rise in value, the condo fee is a killer, and you likely will have trouble finding a buyer in the future. Please, if you must buy, choose a townhouse or single family home (unless you choose a condo in Georgetown or Adams Morgan - urban condos are okay). and don't buy unless you plan to stay there for at least 7 years. Too many people buy too soon.


Fairfax VA: Having the money sit in an account seems like a total waste, given the many other investment options -stock- that can gain greater value and left in a will.

Ric Edelman: The money isn't sitting, of course - it gets invested. There are 33 investment accounts to choose from, from some of the best mutual fund money managers in the business, including Goldman Sachs, Morgan Stanley, Putnam, MFS, Wellington (the folks who manage money for Vanguard funds) and others. It is safe to assume that you will earn highly competitive returns from the trust -- and that's how the child can amass millions over time!


Michelle Singletary: Several people have questioned the $300 set-up fee for the Ric-E Trust. What is that money for? When annualized over the years isn't that an extra cost that could be avoided if people just bought a Roth IRA in their kid's name?

Ric Edelman: The $300 fee covers the legal and administrative costs of establishing the trust. Managing the trust (once set up) is done at no cost forever. Over a lifetime, this is a negligible fee.

And the Roth? Fine, except for several points: first, you can't open a Roth for a child unless the child has income (and young kids don't). Also, you are limited to $2,000 - the trust has no such restriction. And finally, the kids are supposed to be saving for their own retirement -- so they should be doing the Roth for themselves -- you shouldn't be doing it for them! Oh, one more point: in a Roth, the child has access to the money. This raises the real risk that they will spend the money prior to retirement. If you want to be certain that the money will remain for their retirement, only the Trust provides this benefit. The Trust is so unique, in fact, that we have been informed recently that it will receive a patent from the US Patent Office.


Michelle Singletary: I concur on the condo answer. I have a great condo in Baltimore that I'm having trouble selling. The market is just too depressed. It was a great tax break now it's breaking my back.


Sterling, VA: Once you set up the RicE Trust, can you add to it periodically? For example, say I want to set one up then contribute $100 per month to it until my child gets out of college?

Ric Edelman: Today, no, but we anticipate that within a few weeks the answer will be yes. This is a neat feature that we are adding to the trust in response to consumer demand. (Initially, I thought people would want to contribute money only once, but lots of folks have told me that they want to add to it over time, so we're making that change for everyone -- current trusts as well as new ones).


Michelle Singletary: So, what's a poor parent to do if they haven't been able to save for their kid's college education?

Ric Edelman: Have the kid marry rich.

Just kidding.

Talk now with your child, regardless of their age, to let them know that college is important, and that they will need to attend in one of the following ways:
1. night school, while working full time
2. community college for the first 2 years
3. employer-provided reimbursement plans
4. academic scholarship
5. athletic scholarship

Notice that I did not mention loans here. That merely saddles them with debt that they should avoid. Instead, I want you and the kids to focus on creative and alternative ways to get that degree. Work smart, not hard and avoid big debts!


Battlecreek, Michigan: It seems to me that the whole thing assumes that the market will continue to grow at todays rate forever. There is no reason to believe this.

Ric Edelman: There is no reason NOT to believe this. Since 1926, the stock market has grown 12% per year on average. During many periods, stocks have been poor investments, but in no 10-year period or more have stocks failed to make money. If you are bearish on our nation's future, move overseas. No one ever became successful in our nation's history by being pessimistic or negative. That's not the American Way. (Besides, if the stock market is flat for the next 65 years, the poor performance of this trust will be the least of your problems!)


Washington, DC: Do you think 50 is too old to buy a first home, or do you think I should just keep renting since I plan to retire in 10-12 years? I know this is a little off the subject, but I have been going back and forth and would appreciate some expert advice. Thank you.

Ric Edelman: Fifty is not too old for anything! you've still got a life expectancy of about 30 years! (My grandmother is 101 and going strong!)

Buy a home if you plan to live in it for 7 years or longer and you truly love it. (and of course if you can afford it. An advisor can help you with this.)


College Park, Maryland: Would you ever be able to take the money out if you were in need?

Ric Edelman: Currently, no. We are working to add a disability clause so the child can get the money if they become unable to work.


Michelle Singletary: And, let's get back to this idea of paying for my kid's retirement. I just can't get with that. I mean, after paying for daycare, shoes (my baby's feets just won't stop growing), a lifetime of Happy Meals, summer camp and even college, why oh why should I care or feel obligated to put money aside for THEIR retirement. Don't get me wrong. I love my two little rugrats but I want them to pay for their own Florida condo when they get old. (and they better have a room for me if I live that long)

Ric Edelman: There are 2 reasons you want to do this, Michelle. First, you love them, and you understand the challenges facing retirees in today's economy. Second, most people are doing this for grandchildren, not children. you are right - as the parent, you won't want to do this (other parents differ though), but as a grandparent, you'll want to do this for them. Reason 2: you'll want to do this for your own estate planning. If you don't get the money out of your name and into theirs, half of your money will simply go to the IRS instead. The trust has proven to be an extremely effective estate planning tool.


Michelle Singletary: So, why shouldn't the kid get a loan for college? This is so often mention as a viable option to go to college it's almost a given. Personally, I agree with Ric. Shoot, my grandmother told me from the jump that she couldn't afford to pay for college for me and that I just had better get a job and pay for it myself. She would have never approved of me borrowing to go.

Ric Edelman: Here's why not to get a loan: my kid sister-in-law pays $1400 a month in loans, but as a physical therapist, she earns only about $4,000 a month (gross!) With net pay about $3200 a month, nearly half her income goes to student loan payments. That's scary!


Falls Church, VA: Hello Rick. Love your radio show. My question is this. My wife and I are about to have a child. What is the best way to start planning for college now?

Ric Edelman: Start saving now (obvious answer!)

But: do not save in the child's name. Instead, invest in stock mutual funds in your name, not the kid's. Reasons: if you use a UGMA or UTMA account (custodial accounts used for child savings), the kid gets legal control of the money at age 18 or 21. Not a great idea to give a teenager big bucks. Also, having money in the kid's name reduces financial aid eligibility. So, keep the money in your name and use it as you see fit when the child heads for college. One of my clients saved several hundred dollars a year for his son. By the time the son went the college, the account was worth $53,000 -- and the son got a full scholarship, so my client got to keep the money!


fairfax, va: Tell us some of the downsides to this investment.

Ric Edelman: The downsides are obvious, (and for more complete info, go to my web site ricedelman.com to read all the material on the RIC-E Trust) but let me state them here:
1. there's a $300 set-up fee.
2. you can't touch the money til the child reaches retirement age (you set the age, min. 59 1/2)
4. the minimum amount to establish the trust is $5,000 (many people can't afford that much , especially when they want to do this for a 7 of their grandchildren!)


Michelle Singletary: What should people do if they are loaded down with student loans? Should parents feel obligated to help pay the loans?

Ric Edelman: There's not much you can do other than pay them off. Under no circumstances should parents pay them off for you. First of all, the parents can't afford to (if they could, you wouldn't have those loans in the first place). Second of all, stop looking to your parents to bail you out of your problems. When you graduated, they stamped the word ADULT on your forehead. (Which is why grads have such a headache.)


vacaville, Ca.: Hi Ric, could you explain on the subject of annuities? I would like to retire at 57 and someone told me that I could withdraw a monthly check for a set amount for 5 years from my 401K and not have to pay the l0% penalty taxes. Thank you-Jean

Ric Edelman: You're talking about 2 different issues. Yes, you can withdraw money form your 401(k) prior to age 59 1/2 without penalty under Rule 72(t) of the Internal Revenue Code. However, this rule is very complex and results in your receiving much less income than you would otherwise expect. See a tax advisor for help on this before proceeding; most people who consider this idea reject it after learning how it really works. As for annuities, yes, they are a good retirement planning tool, but only for certain circumstances. Among them: you must plan to leave the money in the annuity for at least 15 years to make it viable compared to stocks and mutual funds. You can learn more about annuities, their fees and risks and how they work, in my book The Truth About Money, or read that for free at my website ricedelman.com


Bethesda, MD: This seems awfully sleazy: having this guy on to hype his own products and services. What's next? An interview with a used car dealer about the terrific bargains now on his lot?

Ric Edelman: I think this is more for Michelle to answer than me, but I'll give it a shot anyway. There is no question that I have a certain presence in the DC area, and there is also no question that the RIC-E Trust is getting a lot of attention. Michelle is not endorsing the trust (which is obvious if you read her Sunday column this past weekend, as well as her critical questions here today). Instead, she is giving her readers a chance to learn more about a topic that's in the news.


Michelle Singletary: Listen, sleazy or not financial professionals are developing new investment products all the time. That's news. As a columnist I want to talk about these new investment vehicles and the larger issues they raise. Like this one and how far parents should go financially for their kids. No better place to go and get the answers then from the horse's mouth (no offense Ric).


Montreal, Quebec : A comment on your response to the guy worried about equity markets in the long run. There are many good reasons
to invest in the stock market.
But if an investment advisor told me to put my money down on something because it was the American way to be optimistic, I start running for the door. You also suggested he could move overseas. I have done this, but, believe me, it had nothing to do with my lack of
optimism in the US economy.

Ric Edelman: You're right, my answer was more emotional than professional. But my message is clear: people who fear that stocks will fail to make money over decades are not talking about investments; they're talking about their own attitude and emotion. So, I answered in that vein. Although I could quote lots of statistics about past performance, there is no way I can convince someone that the future will be as rosy. I find my abilities in this area to be quite inadequate. As for leaving the US, one of my clients did this a year ago. He expatriated to England, for lots of reasons. Among them: dissatisfaction with the U.S. economically. He left a year a ago, and 2 weeks ago, he emailed me that he's coming back. He decided that the US was better after all.


Arlington, VA: When will parents realize that the value of an 'brand name' university is limited? I am a rather successful 25 year old who attended a good state university on a full academic scholarship. I have no debts and am earning a very comfortable income - the same income that my ivy league coworkers with tens of thousands of dollars in loans earn. Don't mortgage your future for the sake of a name!

Ric Edelman: Hear Hear

Michelle Singletary: Like I always say. No one on your death bed is going to ask you what college you attended.


Arlington, VA: When the child reaches age 18 or 21 is s-he responsible for it? What would happened to the trust if the child dies prior to reaching 18 or 21 or 59 1/2? What provisions should be made in case the child dies before taking hold of the trust? What happens to the investment?

Ric Edelman: Tax law is clear on this point: if the child dies prior to getting the trust's assets (meaning, prior to reaching that "retirement age" you set), then the money is distributed immediately to his heirs. If the child is under age 18, that means his/her parents. If the child is 18 or older, the $ will go to his/her spouse and/or children or other relatives per his/her will.


Washington, DC: You seem to have a very unrealistic view of people's incomes. If your relative is making $4000 monthly -gross-, that means a yearly income -gross- of $48,000. There are plenty of people in this area who don't make that much -especially us federal workers-. You need to reevaluate your perspective on income and what the average Washingtonian makes!

Ric Edelman: Actually, your comments endorse my point. The average US worker earns less than $27,000 -- believe me, I know very well what typical incomes are -- yet college costs are not based on occupational incomes. This was my point, and you show that you agree with me. If my sis-in-law is making a (whopping) $48,000 a year and STILL struggling with a $1400 monthly loan payment, how on earth could the AVERAGE worker survive? (that's a rhetorical question, by the way). This is why I am against the idea of allowing high school students -- 17-year-olds -- choose the college they will attend. They might know the cost of the school but they don't know what the income will be from that degree. Colleges don't warn their students that their incomes will be limited by their career choices. I talked about this when I gave the commencement address at Rowan University in June. If you'd like to read the text of my speech, go to ricedelman.com


Michelle Singletary: That's it for the day. Thanks for the questions and see you in two weeks.


© Copyright 1999 The Washington Post Company

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